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Just like all the other industries and business support services that have been affected by the Covid-19 Pandemic, the accounting and auditing space has also suffered a major blow with this outbreak. Some of the biggest global accounting firms, such as Ernst and Young LLP, KPMG, PriceWaterhouse Coopers and Deloitte LLP have had to make a large number of changes in their auditing and accounting policies, as these firms have the auditing authority for some of the biggest corporations and businesses across the globe. The situation is very similar in the United Kingdom as well, where, by the end of March, a large number of quantitative easing measures have been unveiled to lend a supporting hand to businesses that have suffered huge losses due to the pandemic.
UK financial authorities have launched emergency steps to avoid instability in corporate reporting and governance, with the effects of the pandemic threatening to hinder access to credible information for investors. This step was taken following an action from the leading accounting firms, who called for temporary relief from rules like the mandatory rotation of audit firms, physical inventory counting and reporting deadlines, arguing that the coronavirus outbreak posed challenges that have not been encountered previously.
This was also followed by a move from the Financial Conduct Authority (FCA), which asked the companies listed on the London Stock Exchange to defer the declaration of their earnings or preliminary results so that the markets do not go through a period of additional volatility in the midst of this uncertain period. The Financial Conduct Authority has collaborated with an audit (Financial Reporting Council) and banking watchdogs to develop new guidelines for preparing and publishing financial statements to allow businesses and their auditors to make the required disclosures in the face of the crisis.
Challenges arising in audit processes during this phase
The Financial Reporting Council (FRC) of United Kingdom, which is the regulatory body for accounting and auditing practices in the country, has been extremely proactive in terms of reacting to the ever- changing situation of the business environment affected by the Covid-19 disease. The FRC considered a request from some of the accounting firms in the country prior to the year-end auditing processes before the March 31, 2020 deadline, regarding the clarification on how the inventory counts and other on-site audit activities, such as visits to international locations, video or screen-sharing systems may be conducted for the first time remotely. There have been other issues as well, which include a limiting of scope, where an auditor acknowledges that he has not been able to obtain sufficient and adequate evidence about one of the financial statements, and a warning about the going concern concept, which is an accounting term that estimates whether a company will be able to continue trading for the next 12 months, likely to cause a company to jeopardise their existing banking covenants.
The FRC has been trying to answer all these issues and questions through updates on its website, and has also issued certain guidelines for both, the companies that are yet to go through the auditing process, as well as the accounting firms, on how the audit processes during this period will take place.
Highlights from FRC’s guidelines
On 26th March 2020, a series of steps were announced by the Financial Conduct Authority (FCA), the Financial Reporting Council (FRC) and the Prudential Regulation Authority (PRA) to ensure that information keeps flowing to the shareholders of these companies and promoting the continued operations of the UK capital markets in a very fair and impartial way. The FRC had provided guidelines for businesses that would be involved in preparing financial statements and a guide for auditors addressing considerations to be taken into account during the ongoing Covid-19 crisis when carrying out audits.
- Guidance for companies on Corporate Governance and Reporting
Corporate Governance
The FRC has highlighted that the need for consistent leadership, sound governance and good decision-making based on accurate knowledge is greater than ever in such tough times. The disruption of work processes and changing demands on resources would have resulted in the need for new ways of management and control.
Risk management
Relocation of workers and the inaccessibility of certain business locations can lead to unworkable or otherwise relaxed risk management processes and internal controls. These alterations may be inevitable or deemed necessary for sustaining any degree of operations in the short-term.
Dividends and capital maintenance
In order to help their balance sheets and have financial stability, many businesses have already changed their approach to dividends and their short-term dividend policies. For those companies that have proposed but have not yet paid a dividend, the upper management needs to remember not only the company's status when the dividend was being proposed but also when it is being paid.
Corporate Reporting
Stakeholders have emphasised that their main information needs apply to corporate profitability, sustainability and solvency. The magnitude and length of the COVID-19 pandemic and its implications for the global economy cannot be anticipated by the Boards. However, it is fair for investors to expect businesses to be able to express their expectations in various situations about the potential impacts on their specific company.
The FRC also emphasised on the fact that these companies would need to determine how much of COVID-19's effect on subsequent reporting dates can be assumed to result from non-adjusting incidents. It will depend heavily on the reporting period, the particular circumstances of the company's activities as well as the actual incidents being considered.
- Guidelines for auditors and accounting firms for processes which are affected by the coronavirus
The FRC has listed out a certain number of factors that are expected to be impacted by the Covid-19 pandemic during the auditing processes. The authority has provided certain guidelines for these affected areas of auditing on how these issues should be addressed. This has been done to support the auditors to deal with the dynamic business scenario in the country primarily caused by the Covid-19 crisis and the aftereffects of the lockdown that has been announced by the government to deal with the healthcare emergency in the country. The following are the highlights of some of these affected areas and the guidelines that have been issued by the FRC in those regards.
Acceptance and take-on of new audit engagements
It has been established that constraints on travelling and office-based work can make it difficult for an incoming auditor to conduct their review of work papers from previous auditors. In this case, the FRC has issued guidance which should be considered by new auditors, and it aims to decide on what work can be performed remotely, assisted by technology to make an evaluation, but confidentiality should still be the utmost priority for these auditors.
Planned Audit
Covid-19's impact is likely to demand the accountants to update their risk assessment methods and the proposed response to identified risk for ongoing audits relating to periods ending after December 31, 2019. In addition, the proposed audit method may lead to obtaining audit-proof on internal controls being operated during the year-end that the auditor may not be able to obtain due to lack of audit staff or lack of access to the audited entity's information or personnel.
Audit Evidence and confirmations
The auditor must get correct, reliable audit proof from their auditor to support the report. Nonetheless, restrictions on travel, movement, and visiting customer sites which means that this will probably not be achieved as planned or within the anticipated timetable for issuing the management's audited financial statements. Auditors may need to consider that there are other ways to obtain correct, correct audit documents for them. It may involve the use of more technology to review data, but only where the auditor has evaluated both the adequacy and appropriateness of the audit data that has been produced.
Disclaimer
The website has been prepared for informational purposes only and is not intended to be used as a complete source of information on any particular company. The above article is NOT a solicitation or recommendation to buy, sell or hold the stock of the company (or companies) under discussion. Kalkine does not in any way endorse or recommend individuals, products or services that may be discussed on this site.
